Gundlach warns: Look here for the next bank bombshell

Don’t look for taper-tantrum worries to go away soon. Of course, we aren’t talking about the Fed ... this time.

Global equities are still fixated this morning on a rumor that was swatted away by the European Central Bank, that it could be looking to scale back its monetary stimulus. European stocks are down about 1%, and that could prove a drag on Wall Street, if stock futures are anything to go by this morning.

The ECB could have been sending up a trial balloon or trying to manage expectations ahead of its Dec. 8 meeting, suggests Frederik Ducrozet of Pictet Wealth Management. The economist told clients he thinks tapering won’t start until the end of next year and the ECB will extend asset purchases until next September.

But this market tends to shut its ears to common sense. As we’ve seen before, it just isn’t comfortable with the idea of a central bank cutting off stimulus.

“We saw a similar reaction when the Fed first hinted at tapering back in 2013 — the difference being that the U.S. was on the road to recovery, so tapering was warranted,” notes Oanda’s Craig Erlam.

Some may be pining for the start of U.S. earnings season next week as a distraction from European bugbears — though it looks like Brexit fears are ebbing this morning. But famed bond investor Jeffrey Gundlach reminds us that Deutsche Bank could be the least of our worries. See call of the day below for more.

The countdown to Friday’s jobs data starts today with ADP employment, often viewed as a bellwether for the big report. Investors will look at how that data goes for signs of more strength in the economy, which could make it easier for the Fed to hike interest rates in December.

On with the show.

Key market gauges

Futures on the Dow
US:YMZ6
and the S&P
US:ESZ6
are tilting lower. It’s worse in Europe, where stocks
XX:SXXP
are getting hit as the market digests that ECB taper talk from late Tuesday. Asian marketsXX:ADOW
had a mixed session, with the Nikkei
JP:NIK
finishing moderately higher.

The economy

ADP reported 154,000 private-sector jobs were added in September, while the trade deficit rose 3% to $40.7 billion. Still to come, Markit nonmanufacturing PMI, ISM nonmanufacturing and factory orders later in the morning.

The call

DoubleLine’s Jeffrey Gundlach has dropped a new name for us to worry about on the European bank front. He says if “push comes to shove,” the German government will support Deutsche Bank.

“But what about Credit Suisse, which has shown a similar decline in stock price? Who’s there to bail them out?” Gundlach said, speaking at the Grant’s conference on Tuesday.

Deutsche Bank
US:DBDE:DBK
shares have logged about a 47% year-to-date loss, amid a crisis that has threatened to roil global markets. This chart shows how Credit Suisse
US:CS
(
CH:CSGN
performed in the same period (down 36%) , along with a few other lenders on the Swiss front. It’s easy to imagine share prices getting hit even harder, if the market turns on those banks:

MarketWatch

The risky business of banks

As iBank Coin’s The Fly noted, it’s also ugly elsewhere in Europe among banks. Italy’s Intesa Sanpaolo
IT:ISP
is matching Credit Suisse’s year-to-date losses. Spain’s Banco Popular
ES:POP
is down 60% year-to-date, and that country doesn’t even have a government (a third general election may arrive just in time for Christmas!)

Gundlach said the EU’s negative-interest-rate policy is running the risk of bankrupting its lenders, and Deutsche is a poster child for this.

The chart

Exactly how much of a bull market do we have here? Not much, going by this chart from Northman Trader’s Sven Henrich:

Northman Trader

It shows market performance from May 22, 2015 to the present, covering the S&P 500
US:SPX
, Dow industrials
US:DJIA
Nasdaq
US:COMP
Russell 2000
US:RUT
and FTSE All World Index, among others.

Henrich says the Nasdaq has reached its highs on the back of a handful of high-cap stocks. “Much of the rally off of the lows has been driven by a renewed collapse in yields again driving the TINA (there is no alternative) effect,” Henrich tells MarketWatch.

“With financials and the larger $NYSE being down 5-6% compared with the highs last year and earnings being down 15%, it is perhaps a bull market in name only,” he says.

The quote

MarketWatch photo illustration/Getty Images, Shutterstock

“Is it totally significant? Probably not, but it’s a nice scoop, and it caused me to reverse positions in terms of being long duration to being short duration...” — Janus Capital Fund Manager Bill Gross tells Bloomberg TV how he reacted to Tuesday’s report (from Bloomberg) that the ECB may slow down its bond purchases before the end of QE.

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